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Daily Update: September 25, 2020


Change Pays Podcast, Episode 3: Closing the Venture Capital Gap

About this Episode

Venture capital continues to sideline both diverse entrepreneurs and investors. Women and people of color are starting businesses at some of the highest rates across the United States and world but are receiving the least amount of investment compared to their white peers. How do we close the venture capital gap? Heather Matranga, Senior Director of Innovation at Village Capital, Melissa Bradley, Managing Director of 1863 Ventures, and Megan O’Connor, Entrepreneur in Residence at Kaplan Test Prep, pinpoint the factors that cause inequality in capital allocation, and find the solutions to fixing the gender financing gap.

From S&P Global, Change Pays is a monthly podcast exploring gender equality and inclusivity in the global economy, workplace, and markets. Host Molly Mintz interviews influential leaders from S&P Global and decision-makers from companies and countries around the globe to continue the conversation about what it means to create inclusive economies and accelerate progress.

Listen and subscribe to this podcast on Apple PodcastsSpotify, Google Play, and everywhere podcasts are played.

Show Notes

Learn more about the topics referenced in this episode:

  • Advertisement: New research from Trucost, part of S&P Global, shows that more than 40% of the world’s largest companies have sites at high risk from the physical impacts of climate change – that’s wildfires, water stress, heatwaves, and hurricanes, among other risks. For U.S. companies, this rises to almost 60%. Trucost’s Physical Risk Analytics tracks these risks across locations and time, pinpointing risk exposure across financial portfolios, company operating sites and supply chains. Trucost held a free webinar on February 11th titled The Big Picture on Climate Risk, where we explained how these risks can be managed alongside additional climate risks such as intensifying carbon pricing regulations. This webinar highlighted the Physical Risk data S&P Global recently highlighted at the World Economic Forum in Davos, and give examples of how companies and investors are responding to these increased risks to their assets.To view the webinar, visit www.trucost.com/events.

  • In her introduction, host Molly Mintz highlights statistics on the current state of gender equality in venture capital. A RateMyInvestor and DiversityVC report found that 82% of VC backed startups have all male teams and 77% of VC-backed founders are white. Women make up only 15% of senior leadership in VC investment firms across the industry, according to a 2018 study by the National Venture Capital Association and Deloitte.

  • Heather Matranga, Senior Director of Innovation at Village Capital, details how the firm's Peer-Selected Investment accelerator program puts entrepreneurs in the seat of an investor to evaluate each other's companies in order to make investment decisions on behalf of Village Capital's affiliated investment fund, which has yieldeda high-performing and diverse portfolio.

  • Heather discusses recent research  developed by the International Finance Corporation and the World Bank Group Gender Innovation Lab, in partnership with the Women's Entrepreneurship Finance Initiative (We-Fi) and Village Capital, that investigates the role of accelerators in the gender financing gap.

  • Heather advocated the business case for supporting women-led ventures and the need for more diversity at the VC level, and referenced a Harvard Business Review study on the bias in how investors evaluate men verses women pitching the same businesses.

  • Melissa Bradley, Managing Partner of 1863 Ventures, wants to create $100 billion of wealth in marginalized communities through the firm's business development program designed to bridge the gap between entrepreneurship and equity. When she changed the company's name from Project 500 to 1863 Ventures in 2018, Melissa wrote that "1863 is the acknowledgment of the beginning of a process for all people of color—enslaved and marginalized—to find freedom."

  • In conversation with Melissa, Molly cited the RateMyInvestor and DiversityVC report's statistics on how only 1% of venture-backed founders are black and a Stanford study that found venture capital funds led by people of color face more bias the better they perform.

  • Megan O'Connor, currently operating as Entreprenuer in Residence at Kaplan Test Prep, previously founded Clark, a software company providing educators with tools to start tutoring businesses, which was acquired by Noodle in September 2019.

  • Learn more about what #ChangePays means for women’s impact on financial markets, politics, and the economy.

Transcript

Advertisement: More than 40% of the world's largest companies have sites at high risk from the physical impacts of climate change. That's wildfires, water stress, heat waves, and hurricanes, among other risks. Trucost's Physical Risk Analytics tracks these risks across locations and time, pinpointing risk exposure across financial portfolios, company operating sites, and supply chains.

Introduction: Change Pays means empowering women around the world to become confident and impactful leaders. Change Pays for me is something that combines the power of research to reinforce the importance of an inclusive and diverse workforce. Change Pays i's about creating a more inclusive place to advocating gender equality. Change Pays means, finally, opportunity and a platform for  our collective voice needs to be heard.

Molly Mintz: From S&P Global, this is Change Pays, a monthly podcast exploring inclusivity and gender equality in the global economy, workplace and markets. I'm Molly Mintz. This month…

News Montage: There are a shrinking number of women in venture capital. There are not enough women who are CEOs of Fortune 500 companies either, but it's always hard to know how much of it is a boys club and how much of it is overt sexism versus more sort of implicit bias of people selecting people like them... The difficulty for women in the tech industry and venture capital at not only just largely goes to the coast, goes to men, and it's largely white men... I've seen some data that shows the more women you have on a board, the better the performance. It'd be nice if this translated to VC boards as well, where the data's not nearly as good... There are some really shocking statistics about how small the percentages of women who are investment partners and venture capital firms. So this is, you know, one piece of a larger question about various gender gaps across the corporate landscape... Women actually raise less venture capital, but they actually generate larger returns... There is also a pretty big gender gap when it comes to venture capital or VC funding, but an effort is being made to make things more equal there.

Molly Mintz: How do we close the venture capital funding gap? Venture capital continues to sideline both diverse entrepreneurs and investors. Women and people of color are starting businesses at some of the highest rates across the United States and world, but are receiving the least amount of investment compared to their white peers. According to recent research, 82% of VC backed startups have all male teams. And 77% of VC backed founders are white women make up only 15% of senior leadership in VC investment firms across the industry.

To pinpoint the factors that cause inequality and capital allocation and find the solutions to fixing the venture capital, gender gap, I spoke with Heather Matranga, Senior Director of Strategic Innovation at Village Capital..

Heather Matranga: The way that businesses are started and supported at the early stage, there are tons of implicit biases that exists, whether explicitly or implicitly, in the way that the system is structured. From an investor's perspective, they receive hundreds, if not thousands, of pitches on an annual basis that they're reviewing to really make decisions on which companies are the most investible. They start to use mental shortcuts, as we all do, and as a result, rely more on what they know and who they know, which leads to, you know, leaving a vast swath of high-potential entrepreneurs  on the sidelines.

Molly Mintz: Melissa Bradley, Managing Partner of 1863 Ventures...

Melissa Bradley: As someone who is female and a person of color, I don't advocate for  new majority entrepreneurship because they look like me. I advocate for new majority entrepreneurship because as a finance person, as a quant person, that's where the data says we should be investing. And it is not just about helping a specific community, but the interdependency of how our economy and our democracy is built says that while you may not want to directly invest in these communities, you should indeed be concerned about their long term wellbeing because they are indeed the undergirding for our entire society at large.

Molly Mintz: And Megan O'Connor, Entrepreneur in Residence at Kaplan Test Prep...

Megan O'Connor: It was after we finished raising our angel round of capital, we raised a million to get started, that I started to realize, 'Oh, I go into meetings every single day with only men.' Every situation, you know, it's obviously me going in saying, 'Here's my idea. Can you please invest in it?' And seeking something from the other side of the table. I was always in the 'ask' situation. You know, it takes quite a few pitches in order to get your first round funded. Some people said 80 plus meetings. So imagine doing that pattern recognition over and over again as always a female asking a male for funding in the end, obviously having no be the majority of the answers.

Molly Mintz: Let's get started.

Heather Matranga sees investors' implicit biases toward female founders in the early stages of their companies as the root of the venture capital funding gap. New research developed by the International Finance Corporation, World Bank Group, Gender Innovation Lab, We-Fi, and Village Capital, one of the world's largest organizations supporting impact-driven seed stage startups, reveals that 'women entrepreneurs face greatly unequal access to the capital necessary to grow and scale their startups. Despite women leading nearly half the startups that participate in entities designed to train and support the development of startups to become investment ready, the gap continues to grow.'

Heather, Village Capital explains that entrepreneurship is a critical tool for solving the world's biggest problems. You've been running somewhat of a social experiment for the past decade to drive investment towards diverse entrepreneurs. Tell me a little bit about how this works.

Heather Matranga: Our focus is really to reinvent the system for supporting entrepreneurs of the future, and by the future, we mean entrepreneurs that are really focused on sustainability and economic opportunity that are solving critical problems in things like future of work, sustainability, financial inclusion, that leads to more economic mobility and reduces inequality. But what we're seeing unfortunately, is that far too many entrepreneurs are left on this sideline. If you don't look a certain way, if you don't live in a certain geography, or you aren't working on a very limited number of problems that resonate with investors, your ability to access resources is very limited. In the U.S. alone, we see that there's a huge concentration of capital really in very few people, places, and types of companies. Oh, we see that less than 2% of venture capital goes to people of color. Less than 15% goes to female- led ventures, and ventures that have both males and females in the leadership team. And we see that most of the venture capital is concentrated in three markets in the U.S. and the rest of the country doesn't really have access to that capital. Our current capital structure, however, leads these entrepreneurs out of the financing realm. And so Village Capital, 10 years ago, we were founded on this radical idea of really flipping the power dynamics of venture investing. Our founders came up with this idea of peer selection where they thought, 'What if we rely on entrepreneurs to make investment decisions on behalf of our affiliated investment fund, rather than us making the investment decision ourselves?' And the process, called peer selected investment, means that we literally bring a group of entrepreneurs together through an accelerator program focused on helping the companies attract investment capital, helping the company scale, and really become investment already. But through that process, they also are putting themselves in the seat of an investor and evaluating each other's companies as an investor. At the end, they collectively make a decision on who from that cohort, from that group of peers, will receive investment from our affiliated fund, VilCap Investments. We've made 111 investments like this to date, and our results are really promising. What we've seen is that this has resulted in a much more diverse portfolio and a high performing portfolio. 46% of our portfolio is female led. We see an 86% survival rate, meaning that these are commercially viable investments. For a U.S. focus, companies more than 30% are founders of color.

Molly Mintz: Talk to me about what you see as the systemic challenges that women and people of color face in obtaining investment and capital. 

Heather Matranga: The way that businesses are started and supported at the early stage. So if you are an early stage entrepreneur or someone interested in the entrepreneurship space, there's a huge risk that you have to take to start a business. You have to forego a stable job and a stable income, which is a risk that many of us aren't able to take. Assuming that you can even start the business and you're able to do that, you then need to rely on your own funding or a close knit and trusted network of friends and families to actually launch that business, which again means that you need to know people that are wealthy. You need to be tapped into those networks. You need to have the privilege and opportunity to even get the initial capital to get your business off the ground. There are tons of implicit biases that exist, whether explicitly or implicitly in the way that the system is structured. From an investor's perspective, they receive, you know, hundreds if not thousands of pitches on an annual basis that they're reviewing to really make decisions on which companies are the most investible. They start to use mental shortcuts, as we all do, and as a result, rely more on what they know and who they know, which means relying on their own network, relying on some implicit bias, relying on patterns that they recognize, which leads to, you know, leaving a vast swath of high potential entrepreneurs on the sideline. If you look at the diversity of fund managers, you see a lack of diversity there. That is a systemic challenge in and of itself. And of course that also relates to the glaring lack of diversity in asset allocators. So if you look at the limited partner pool makeup, or those that are investing—the investors that are actually investing—into venture  capital firms, there's a lack of diversity there.

Molly Mintz: So it sounds like what you're saying is, you can't achieve what you can't see. If all of the venture capital funds don't have a diverse group of people working for them, they're not necessarily going to pick diverse entrepreneurs to invest in. And then on the flip side, if none of these entrepreneurs are given their big break, so to speak, to get started, we won't be able to have a more level playing field where everyone can somewhat have the ability to start at the same place.

Heather Matranga: I don't think it's just a pipeline problem, though. I think that is far too often a scapegoat just to say, "Well, I'm not seeing enough high quality women entrepreneurs coming through the door.' I do think that and there's lots of literature out there that shows the bias that investors also bring to the table when evaluating companies. There was a study a few years ago that illustrated the differences between how investors will evaluate a man picking a business versus a woman, even if they're pitching the exact same business. Women tend to be asked  much more risk-based questions about their business and how they plan to address the risk of their business, whereas men tend to be asked much more  potential focused questions. So: 'What's the possibility? What's the vision for this business?' They're approaching these businesses at the outset with their own bias.

Molly Mintz: So Village Capital and the International Finance Corporation recently released a report regarding the role of accelerators like yours in venture capital and the gender financing gap, focusing on emerging economies. What were the key findings?

Heather Matranga: The IFC led this research around really understanding what the gender financing gap looks like and how accelerators, or organizations that are focused on helping companies scale their ventures and access capital, what these organizations are doing to impact this gap currently. And when we say the gender financing gap, it's the disparity and the distribution of capital between male and female led companies. So that only 11% of venture capital is going to female led companies, that's really the gender financing gap that we're talking about. And so through this research, we leverage data from the Global Accelerator Learning Initiative, evaluating a little over 2000 startups, to really understand, what does the gender financing gap look like at the time of acceleration and how are accelerators impacting it? We were really surprised and dismayed to see that acceleration actually seems to widen the gap when it comes to equity, despite the fact that accelerators are accepting similar rates of female led ventures—and by female led ventures, we mean startups with at least one female founder. Yet, we see that the men coming out of accelerators and male-led ventures coming out of accelerators are increasing the amount they raise, on average 2.6 times as much as female led ventures, which is leading to an increase or a widening of this gender financing gap. One of the reasons behind this is acceleration is really effective at helping male led ventures increase or access more equity. It has, on average across the board, no impact on the ability for female led companies to raise or increase the amount of equity. On the other side, there are other financing tools available, one of them debt, and when we evaluated what the debt financing gap looks like in comparison to acceleration, we see actually the opposite, where if there's a debt financing gap coming into accelerators. It's less than the equity financing gap, but it is still there. And acceleration seems to have a much more positive impact on this debt financing gap. Women led ventures are increasing the amount of debt they raise post acceleration, whereas acceleration doesn't seem to have an impact at all on the ability for male led ventures to raise debt. So it's literally the opposite. So, what it means essentially is that acceleration is helping women raise debt, but that does not mean that debt is always the most impropriate financing tool. But one of our hypotheses, just based on our experience working with startups and understanding the state of debt is that oftentimes debt can be inadequate, particularly for early stage ventures where they may be pre-revenue. They may not yet have enough traction to start repaying that debt so immediately, and therefore it can limit their scalability. Debt obviously has a strong role to play in financing companies, and they're often appropriate times to use debt. But what we're seeing based on this study is that perhaps women are resorting to that because equity really isn't an option or they're facing so many more challenges.

Molly Mintz: The report also points out that the gender financing gap or the venture capital gap can't be so easily attributed to differences in the quality of the startups, which shows that investor bias and risk perception may play a role. What biases and risk perceptions do investors have of female entrepreneurs and entrepreneurs of color?

Heather Matranga: The feedback that we receive is, perhaps women led ventures are raising less equity because there's something inherently different about the makeup of these companies. Could it be that in average women led companies, the founder has less experience leading a company? Could it be that their education levels are less, that they're younger and therefore investors see an increased risk? Could it be that they have different instances of IP, that they're in different geographies, that they're in different sectors? Are there underlying differential variables or differences within the companies that are explaining why this gender financing gap exists and why it's increasing. And what we found through the study is that across many of these variables, male and female led companies look very similar. And across the variables where there are differences, there are some differences in sector, or there are some differences in geography. When you account for those differences, you still see this gender financing gap remain. Which has led us to really evaluate the potential for implicit bias and the heightened perception of risks that may play a role in this gap. Investors, particularly equity investors, when they're looking at an early stage investment—so, early stage companies often don't have very much traction. They don't have very much proof point yet of actually achieving their mission or actually being able to reach product market fit— investors have to rely on a few different characteristics to try and evaluate whether or not this investment will lead to a profitable return for them, and when they're evaluating a startup that may not have those characteristics, they're not seeing the patterns that they are used to seeing. We generally call this pattern recognition, and that can lead to implicit bias, whether overtly or covertly. I don't think it's necessarily that investors have nefarious intent. I think it's they're evaluating companies with limited information and therefore relying on what they know and who they know.

Molly Mintz: What other solutions do you see possible to close the gender gap here, besides mitigating the risk perception? Is the onus on the investor or the entrepreneur to dismantle these misconceptions?

Heather Matranga: Where we see gender diversity issues on the capital allocation side, all the way from the limited partners that are asset  allocators that are investing into venture capital firms to the fund managers and leadership within the venture capital firm, there are strategies to make a more diverse pool decision makers. For example, if you sit on the board and help make decisions around how investments are made into venture capital firms, simply ask the question around, 'What are the diversity metrics?' I don't even know or think that that question is asked all that often at the LP or the asset allocator level. If you are leading a venture capital firm, really identifying and recruiting more diverse leadership into that firm and mentoring them. If you are making investment decisions, thinking about how bias is impacting those decisions and putting mitigating factors into play. If you're not seeing enough women in your pipeline, which is, you know, a common comment or concern that investors have, I think there's a lot of work to do, too. Build the pipeline, which could be, you know, go out and mentoring women entrepreneurs. I also think there's work to be done in identifying entrepreneurs. It's very natural to rely on the network and the people you know, and the trusted relationships that you've built for introduction and to evaluate the viability of a business, and a lot of those networks are very close knit networks. Getting women in the door more often and more access to these networks or going outside your own existing network of investors who identify entrepreneurs. Maybe female led entrepreneurs can be more aggressive in their target, the amount they actually want to raise, for example. Or maybe female led companies can be more visionary in the way that they're talking about their business, but different strategies for entrepreneurs to help bridge that gap. There's a lot of opportunity for accelerators to really influence the way that investors are evaluating startups. But I think there's a lot of innovation that we can do in terms of actually evaluating businesses to address bias and in terms of the types of financing structures that we're using to invest in businesses. I think also outside the world of acceleration, just broadly recognizing that this gap exists and that the gap isn't necessarily easily explained by differences in the companies that might, on a case by case basis, be why an investor chooses to invest in one company versus another, but as an industry or at large, that's not the only reason for this continued gap—that there are things about the financing tools that we have available, or the way that we're making decisions, that is maintaining the status quo and continuing this cycle of a disparity and capital allocation between male and female led ventures.

Molly Mintz: Melissa Bradley, Managing Partner of 1863 Ventures, a Washington, D.C. based business development program designed to bridge the gap between entrepreneurship and equity, believes venture capital is inherently biased because it is a conservative asset class. She wants to create $100 billion of wealth in marginalized communities and views black and Brown Americans as new majority entrepreneurs who hold the most economic opportunity out of all other population groups across the country.

Molly Mintz: Why did you create 1863 Ventures?

Melissa Bradley: 1853 Ventures is probably my third iteration of an entrepreneurship program targeting historically marginalized communities, meaning mostly communities of color. And the decision was based on the fact that when I started my business, many years ago, I could not find any kind of support, whether it was emotional, business, financial, technical, and I went to all the typical places that you're supposed to go as a business person, including the SBA and they essentially told me that I was 21 years old, I was black, and I was a female, and there was no way on earth I was going to be successful in financial services. Luckily, I went on to be successful, but I realized pretty quickly that if anyone wanted to be an entrepreneur, particularly if they didn't look like your typical success story, they were going to struggle for support. And that has become an even more critical issue for us as Americans when entrepreneurship in general in the United States is on the decline. It's down 40% amongst white men. However, African American women are the fastest growing entrepreneurs in the country, starting businesses six times their white male peers, and Latino businesses are the fastest growing percentage of businesses by percentage, unfortunately not by dollar. And therefore, when you have those segments of the population as the primary drivers of entrepreneurship, which means that they're primary drivers of employment, someone needs to support them. And so 1863 is I know one of many, but deeply committed to helping, as, I would say, the largest segment of entrepreneurs in United States grow scalable businesses with the sole purpose of creating jobs in community wealth.

Molly Mintz: 1863 Ventures was formerly called Project 500, but you changed the name to signify the year that Congress signed the Emancipation Proclamation. When you rebranded, you wrote that, I quote, '1863 is the acknowledgement of the beginning of a process for all people of color and slaved and marginalized to find freedom.' Tell me more about the significance of history to the present day values and actions of your firm.

Melissa Bradley: So we evolved our name in part because of what you mentioned in this desire to signal the economic power and contribution of the new majority that started back in slave days. The entire United States economy, including the central bank, is based upon slavery and having individual humans as assets. And so it was important that if you could recognize the new majority, literally as demographics shift, as an economic contributor back then, but in a very nontraditional, subservice, and hatredful way, then give us the opportunity as we are indeed continue to be economic drivers in our community, give us a chance to do that moving forward, particularly as we do become the majority in this country. We were catalyzed to change the name because we initially started as Project 500 with the premise that we could find at least 500 high growth businesses in the District of Columbia run by women or people of color. Historically, from a policy perspective and a program perspective, there's been an inordinate focus on startups, smaller companies, mom and pop shops, sole proprietorships, and all of those are amazing, but they're not necessarily going to be the job creators of the future, particularly as many jobs turn to technology. Then what do you do with the basic people who don't have access to that type of education? We said we would find 500 people in three years, and many people doubted us. We found over 518 months, and so it became a requirement and for us to change our name because we had successfully fulfilled our mission way ahead of schedule, finding 500 businesses. But in doing so, we also got calls from all over the country saying, 'Hey, wait, I hear you doing this thing in D.C., how do I become a part?' Because 80% of the entrepreneurship support organizations in the United States are focused on startups, just about 12% have focused on helping companies grow and scale, which is unfortunate because that's when people probably need even more help is when they're trying to grow and scale. But it certainly speaks to why 50% of all businesses, irrespective of race and gender fail within five years or less because of the lack of support. So the fact that we hit 500 before our time, in fact, we recognize this was not just a problem within a small geographic region, but what we saw in D.C. was really a proxy that was happening across the country in many urban and even rural communities, and the fact that data showed, not just because I'm a woman of color, the data showed that we were the fastest growing segment, it was important to signal what the economic opportunity was within those communities.

Molly Mintz: There's still this schism nonetheless, because Stanford researchers found that venture capital funds led by people of color face more bias the better they performed. So the scrutiny is on both sides of the table. It's the startup, but it's also the investor. From an impact investing standpoint across the industry, how do we fight this kind of discrimination?

Melissa Bradley: I think time will tell. I mean, my hope is that there are many efforts. There's for years has been emerging manager platforms that have been designed to give investors of color an opportunity to invest. I would say there is a movement now as there is wealth within black and brown communities, you have many more individuals becoming engaged, at least within the angel investing community, which is wonderful, getting a chance to do so. But I think it's still a time of process and education. I think a lot of people think that you need a whole lot of money to invest, and that's not true. I also think people think it's really, really hard to invest, and I'm not going to say that it's not, but there are now so many different channels that can support investing from crowdfunding platforms to family offices to donor advised funds to fund a fund, and so I think with the democratization of financial products that are moving downstream to more diverse communities, I think that you will begin to see more and more people that are exploring this opportunity to invest. But I think it's important as a finance person to recognize that depending on who's investing, that bias will always remain. Venture capital is inherently biased, right? They are traditionally and typically dealing with pension fund money that, as someone who at one point in time paid into a pension, that's a pretty powerful and intense requirement and responsibility to be responsible for somebody's retirement. And so their risk profile is pretty conservative because they're responsible for thousands of people. So I'm not going to deny that there is bias, but I think we also have to be mindful that certainly within the venture capital asset class, and certainly in private equity, it is much more conservative based on who the limited partners are than you would see, say in the angel investing community.

Molly Mintz: You mentioned some statistics before that for instance, black women are creating businesses at the highest rate across any group of people across America. But then when you look, only 1% of venture backed founders were black.

Melissa Bradley: That's right. They're not getting venture capital, right. Considering that I'm older. You know, when I started a company, venture capital was not considered the first line of offense for capital. It was max out your credit card; it was call your friends and family; it was go to the bank or go to the SBA and get a loan. Venture capital was not as prominent. It was definitely preserved for those billion dollar businesses, those really big businesses. And historically, if you look at some of our larger tech companies, they weren't funded by venture capital. In fact, they were actually funded by the federal government. They were funded by SPIR and SPTR programs. When you look at Oracle, you can ook at Apple, those were all funded by government grants. So historically, venture capital has not been the star of the show. But what has happened there? There's been this sexy nature of venture capital. There's been some successful exits. There's been, probably more as of late, non-successful exits. There's a ton of television shows that make it seem cool and hip and something you accomplish in 15 minutes, which indeed is a misnomer because it takes anywhere between six to nine months. But there has now been this recent focus on venture capital that I think is unfair and overrated. I think the majority of the businesses in this country are not venture backable businesses, period, irrespective of race and gender. They just don't fit. Unfortunately, just because you don't fit it doesn't mean you won't try. And so I think there's an inordinate amount of people who are racing to venture capital and they really don't need it. And for entrepreneurs of color in particular, one, I think we pretty much know we're probably not going to get it, but also don't necessarily always have the appropriate social capital to get to the right people. And so we start businesses without the presumption that we will get venture capital. I think we start businesses by calling our friends. We have a lot of entrepreneurs in our program who start the program with a full time job. Now, by the time they finish the program, they've left their job, and that's part of the transition that we expect of them if they're going to grow a scalable business. But the reality is is that those full time jobs oftentimes become the primary investor in those businesses. And so it is not surprising to me that there is a disconnect of lots of businesses being created, but not receiving venture capital. Because one, conservative asset class. Two, we're not traditionally growing those kinds of businesses right out the bat because we don't have the social capital. We don't have the early stage money that people can just quit their full time jobs and working with this full time. And three, if you see that you're not there, we don't tend to go there. I think we watched the television shows and we see a few slivers of success, but that's not the norm. And so that doesn't tend to be our starting point. And I say if there's been some movement, I'll say finally, within the entrepreneurship community, that when individuals have gotten venture capital, it hasn't always yielded the best outcome. One of the greatest concerns, I was actually speaking with someone yesterday, is that, you know, venture capital is wonderful, but it is truly for individuals who want to have a high growth business and clearly we are on track for an exit. If you're trying to start a business that you want to be your lifetime lifeline of economic opportunity, or you're trying to start a business because you want to create a legacy within your family, venture capital is not the right choice of an investor. And I do think that as these shows have come out, as there have been sitting up or getting blessed within the community, there's been a greater intentionality, at least amongst programs like mine that say, 'Hey, venture capital is out there, but it was one of many asset classes. Make sure that whatever money you go after is appropriately aligned with your mission.' And with your longterm goals for the business. So I do think there's been some education around the power, but also the challenges of venture capital. And so the business creation still continues sometimes out of pure survival. Now there are folks who are looking for many other alternatives such as debt, such as crowdfunding platforms. Unfortunately, sometimes they even turn to factoring, or things that are not as good for them, but just really figuring out, how do I get this business off the ground?

Molly Mintz: What are 1863 Ventures' big goals? If it's introducing people to different forms of capital funding, or is it really to incorporate this new majority group of entrepreneurs onto the same fast track of success as all other population groups within the States?

Melissa Bradley: So our big goal is to create a hundred billion dollars of new wealth in historically marginalized communities. And we're tracking that by revenue growth of the companies that come through the program, job creation of those who come to the programs, and leverage capital. And that is our goal for three reasons. One, we think it's an ambitious enough number that in some cases scares people, but it gets them to thinking and that's all we want them to do. We want them to think and recognize and own the fact that there are communities of color and communities of women who have the power to be economic drivers. So that's the first one. The second is to change I would say the negative narrative about women and certainly about entrepreneurs of color with respect to what our potential is. It should be scary for someone who is in this country recognizing that the future of this country in terms of numbers has been left in the hands of those who've been undereducated and under invested in. And so it's time to course correct if we really want us to still continue to be a superpower. So I think that's important too, to change the narrative. And the third thing is, I actually think we can do it. I truly do believe that if we are able to touch enough businesses that we can indeed help create that kind of wealth. And if you look at all of the changes that are happening from the technological perspective—jobs being lost, et cetera—the reality is that we have no choice but to do this. And so that's our big goal. And I think, you know, we're on track for the first three years, we've started to informally count and really test our programs, and we have cumulatively supported $160 million of new revenue amongst our companies. And that's about 500 plus businesses that have responded to our survey over time, and that has yielded just over 1800 jobs. So we still have a ways to go, but at least we had evidence that what we're doing is starting to work and now we have to do in practice what we preach, which is to take it to scale.

Molly Mintz: In your perspective, why is access to capital and wealth so important? Can fighting the pervasive lack of access to capital and wealth contribute to the fights against racism and sexism?

Melissa Bradley: I think access to capital is an imperative in a capitalist system. And clearly there are enough debates happening around whether or not capitalism works or not, but the reality is that's the system we're in, and so the only way to be able to be an active participant is to have access to capital. For me, the signal of wealth is significant because it brings a level of stability and security and power that these communities have not had. And so it is a proxy for, dare I say, the American green, but also just a proxy for one's ability to live healthy and happily and not get caught up in what we see lots of times in our communities, which is the grind. Underpaid, overworked, barely surviving, looking for safety nets that are slowly being pulled away from them, and so it's extremely important for us to focus on that just because we believe everyone should have the opportunity to just literally live a happy and healthy life.

Molly Mintz: The second part of my question though, I'm interested in hearing your thoughts. Is this pursuit of living this happy life, having this access to capital, ensuring that people of color and women have the same opportunities? Do you see the work that you're doing as contributing to the fight against racism and sexism?

Melissa Bradley: I would say that we're trying to. Right? I mean, I certainly have been around long enough to know where we can claim attribution with what we did. I think we can point to very specific examples of businesses and we survey all of our members annually where we have made a contribution to their ability to generate capital and generate wealth. Whether or not we solve racism or contribute to that, I want to be mindful of what we take credit for. I think what we have done is two things, and we've asked this specifically. What we have done is instilled and increased a level of confidence in the entrepreneurs that come through our door, and that in turn, I think allows them to have a more powerful voice.

And to be a better advocate and ambassador for themselves, which ultimately I would like to believe helps to break down racism because you're changing stereotypes and you're inserting yourself in situations that you probably otherwise would not have been because you now have a greater level of confidence about your own capacity. So I'll say, I'd like to think we're making a small contribution there. We also have been acknowledged by our members for creating community. You know, being a woman in America is hard. Every day on day. Being a woman of color is even harder in America, every day on day. And so having a community that you can count on for support, for a reality check, for reflection, for a safe space, and for advice, I think is also very important. One is clearly very external facing and helping people engage with others to change their negative perceptions, and the other is that safe place and a safe haven to take a respite as you try to battle all the stereotypes on a daily basis—so I think those are two very indirect ways that our members have told us we're helping them both take a step forward with their business, but also gain more confidence and success in what they're trying to do moving forward.

Molly Mintz: To elevate people that have been underserved, we have to give them more support in ways that perhaps are not talked about enough. But to close the venture capital gap, is the onus on the investor or the entrepreneur to really push for that change?

Melissa Bradley: I think it's both. You know, I think it's up to the entrepreneur ,what I think anyone would define as an entrepreneurial leader, and so I do think it's up to the entrepreneur to be able to advocate for themselves. That entrepreneurship is an extremely competitive field. People are starting businesses probably every hour, every minute, every second, and it is part of one success and ability to grow that business that you can clearly articulate what your competitive advantage and why will you be successful, so. absolutely. I also think it's up to the investor. You know, as you had alluded to earlier, there's tons of research that supports investors of color, historically, even in the mutual fund business, have outperform traditional white firms, but oftentimes still don't get the capital. I would say there has been a recent surgance of investment in investors of color, and if they perform well, then they should be rewarded, right? That is the idea of capitalism, that you're consistently generating shareholder value. We can debate whether or not that should be the focus, but that's the focus. And so I do think that from a LP perspective, it is incumbent upon those investors to be willing to have diverse portfolios of other investors and say, Hey, if I'm looking at statistics—and I see this personally as an economic imperative, not just a moral imperative—and the numbers say women and people of color are starting businesses faster than it seems to me that's where the money should go as a finance person. So I do think it's beholden of investors to look for those who can help them invest in those communities, and then I think it is up to those funds that have been created or invested in to go where the opportunity is. I'm not asking for investors to provide a handout, but I am saying that there are not too many communities in this country right now where women and people of color are starting businesses faster and they should not be considered. And I do think the challenge though, and I think the defense that particularly the venture capital community gets, is that when a woman or person of color starts a business, there's three zero after it. When a white man starts a business, there's six to nine zeroes after it, and that's just the fact, right? The percentage growth rates are a higher amongst women and people of color but the actual dollar value is significantly less than their white male peers.

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Molly Mintz:  Megan O'Connor describes herself as 'an entrepreneur that enjoys solving complex problems with a societal impact, especially related to education or the future of work.' Currently the Entrepreneur in Residence at Kaplan Test Prep, she previously founded Clark, a software company providing educators with tools to start tutoring businesses, which was acquired by Noodle in September 2019. Under her leadership as CEO of Clark, the company raised a total of $3.5 million from investors, including Lightspeed Ventures and Winklevoss Capital. She recounts her experiences as a woman in technology and female founder raising capital.

First, can you tell me about your interest in education technology?

Megan O'Connor: So my interest in education technology stemmed, I think originally, from my mom. I was raised by a mother who was a public school teacher and still is to this day. And I just always grew up with education being a topic that happened in our household. I also grew up in the Silicon Valley, so obviously technology was at the forefront of pretty much every career conversation I had with either a teacher, a peer, or my parents growing up, seeing as how that was the economy that was all around us. And so the combination of those two forces definitely pushed me into my ed tech background. I will say I started in just technology generally. It's only when I was 25 and had what I think is what a lot of individuals have around that stage of their life, a quarter life crisis, where they ask themselves, 'Okay, how am I making the world a better place? What's my impact going to be now that I'm a full fledged adult in the working world?' that I realized that being a technologist wasn't enough, that needing to create impact wasn't just something that I selfishly wanted in order to get up in the morning with a sense of purpose. It was also desperately needed by the people around me. And so I've spent the better part of the last 12 years working in some form of education technology. And most recently, it culminated with founding my own software company called Clark. There's kind of two schools of thought in future of work software. There's those people that believe you should create vertically agnostic software, so that way it can apply to everyone and go across lots of verticals. And as VCs like to say, have, you know, really expansive addressable markets or Tams. And then there's people that say, you have to create future of work software vertically specific, because in order to really change the way that people do their workflows to change the way they live their lives, you've got to be solving a need in a way that really is sticky to how they would have done it manually. Because I'm a type-A person who's always thinking about, 'How can I optimize my time? How can I optimize my work? How can I do more with less?', my personality lends itself to loving software a lot. So that was the lens by which I looked at what my mom was doing for her career. My mom, like I said, as a public school teacher, she teaches middle school and runs a speech and debate club at her school. But in addition to that, she also tutors on the side, and she does that because guess what? Public school teachers in America don't make a lot of money. And I don't think I'm the first person that has told anybody that. But what's interesting is that you'll find that there's this really robust economy of teachers who are hustlers, who are doing other things outside the classroom to make income. There's this robust economy of teachers who are really entrepreneurial in their own right, in addition to providing like a very important service by being an in-classroom educator. So here I am as an adult, post quarter life crisis, watching my mom teach all day long and then tutor all night, and I, you know, wanted to see is there a way I can help my mom work a little less. I set out to see if there was software for my mom to run her tutoring business, looking at all the vertically agnostic solutions. Again, meaning that they could work for any type of person running their own independent hourly business outside of their day to day job. Nothing worked for a lot of reasons. So that's where I identified the needs and that's where I set out to build the Clark software.

Molly Mintz: How quickly did you scale your business?

Megan O'Connor: I came from the nonprofit sector, so I think I personally had already had this mentality of you need to do a lot with very little. You know, it's just the mentality of someone who has to ironically raise money in order to provide a service. Interestingly enough, you need have the inverse mindset in order to run a venture backed business. Because the idea is, you know, you need to show that you can 10X either your users or your revenue or some other vanity metric in order to justify that you should exist in the world. So I would say that the first year and a half, I scaled pretty slowly and I kept a super lean team. We were operating on top of other platforms that already existed. After we raised our seed round, I scaled much quicker. It was not something that necessarily felt natural, but I went for it. And that's when we, you know, tripled the size of our team, moved into a bigger office and started spending the majority of our operational budget on digital marketing.

Molly Mintz: At what point within that process did you start looking for venture capital investment?

Megan O'Connor: You know, I started my company on the tail end of the wave of when you could actually raise money based on a, you know, deck where you didn't necessarily have to have a product out in the world. You didn't have to be revenue positive. That has substantially changed since I started my company. Now when I'm looking at deal flow with investors, you know, they're looking for companies who have pretty clear user groups already identified, but also using the product are looking for people almost 1 million in ARR post revenue. So for us, we actually started looking for venture capital funding pretty early. The reason we did that was I was not in a financial position to bootstrap the company. You know, I had worked in the nonprofit sector prior and you know, needed to make a salary and the people that I was acquiring to come work for the company were in the same situation as well. So we set out to raise venture very quickly.

Molly Mintz: Tell me about how you did that. You walked in with your pitch deck and what happened?

Megan O'Connor: I would say the first thing that I typically did is try to get people connected to the why. Because if you are pre-product—we were, we had a product in the field, but it was very early—you want to make sure they believe in you as an individual because what they're looking at isn't necessarily something that's going to impress them, right? It isn't the end state of what your version one is going to be. So when they invest in you at the beginning, they believe that you have the ability to build something. And so I did walk in with my pitch deck, but I would say that predominantly I used my first venture capital meetings to make a connection to who I was and the mission behind why we were doing this and why we were different in those early pitch meetings.

Molly Mintz: How many of the potential investors that you met with, ballpark range, were women?

Megan O'Connor: Gosh, not many at all. There were not many women that I pitched to in the beginning at all. That has since changed. When I went out for my second round of capital, there were substantially more female investors out there. I wouldn't say that it was the majority of who I pitch to, they were certainly still the minority, but that first round of capital I raised, I would say I maybe only pitched a female investor once.

Molly Mintz: Was the experience strikingly different? Did you realize at the time, Oh, this is the only woman that I've met with in my tens of meetings, or was it just another day going into someone's office?

Megan O'Connor: You know, it's a good question. While I was going through it, I don't know that I necessarily had too much of a recognition of exactly what was going on, but it was after we finished raising our angel round of capital, we raised a million to get started, that I started to realize at the tail end, Oh, I go into meetings every single day with only men. Every situation, you know, it's obviously me going in saying, 'Here's my idea. Can you please invest in it?' and seeking something from the other side of the table. I was always in the ask situation and after doing, you know, it takes quite a few pitches in order to get your first round funded. Some people said it's 80 plus meetings. So imagine doing that pattern recognition over and over again. And then doing that pattern recognition over and over again as, always a female asking a male for funding and obviously having no be the majority of the answers. I didn't realize, like I said, while I was going through it, but it was only after the fact I was like, 'Oh, that was funny. I wonder what kind of mental impact that's gonna have on me.'

Molly Mintz: What mental impact has it had on you?

Megan O'Connor: I would say I'm lucky in that for the most part, I've had wonderful investor relations. I've had wonderful pitch conversations and have fully, you know, gone through the venture cycle multiple times and have very few bad things to say about it. With that said, some of the unfortunate things that would happen during that situation was just small things like investors saying things like, 'Well, I don't know a lot about tutoring. That's typically something maybe that my wife is in charge of in our household.' And it just felt like every once in a while something would end up getting gendered in the conversation when this isn't necessarily a gendered topic. You know, if I was creating a women's health organization, totally understand, but this is education and it's something that too often I think kind of got skirted as a female issue versus a gender neutral issue.

Molly Mintz: And in those situations where you did feel like it was a gendered interaction, how did you respond?

Megan O'Connor: Honestly, typically by just being more of myself. At the end of the day, I wasn't going to not be the woman in the room—I was. And so instead of trying to be more masculine or, you know, trying to, you know, be different, or one thing that I wasn't, I really just leaned in to being who I was, which is a fairly energetic, fairly excitable female who cared passionately about education. And so my job in that room was to make sure that they left that meeting having a deeper passion for education than they came into it. And yeah, I would say more than anything, I doubled down on leading into my quirks than trying to be something I wasn't.

Molly Mintz: Research shows that implicit bias prevents female founders from receiving equitable and adequate capital allocation than their male peers. And that's only on a gender line. When you put race into the equation, we see that black women create companies in America at six times the rate than any other group, and yet receive less than 2% of funding. What are your thoughts on this now that you've been in this space for such a long time? You've been in all these different roles, and as I know, you mentor and help other founders get their start.

Megan O'Connor: Yeah, I would say, unfortunately, all the stats that you just listed didn't surprise me. You know, I'm a part of enough founder circles, some of them women's specific, some of them not, to have had firsthand interactions with people who have had not positive experiences raising venture capital as a female.

So I believe that everything you said out loud is something not only that I know to be true from my peers, but something that's been reinforced from kind of just the general community time and time again. Now I wouldn't say that I had, you know, no implicit bias while going through the experience. You know, one of the things that I can definitely point to is the fact that while raising, I definitely felt as if I met with predominantly male VCs more times than I needed to. And I think it was for a couple of reasons. I think that, you know, many venture capital firms were hoping to invest in more female founders, and as a result, you know, they were seeking out people like myself, who was a new software company with a female at the head of it. And I would find myself not doing one pitch, but three pitches when that was a little bit unheard of. You would typically just go and do the full pitch once, sometimes twice if you would do it with the full partnership, but they just kept having me back, kept having me back and my perceived explanation as to why is they really wanted to invest in a female founder. At the end of the day, they weren't investing in my company because I didn't fit the investment thesis of their fund.

And so what that first round of capital, some of the feedback I would get back as to why the investment wasn't made were things like, you know, 'It turns out we don't have a board member that would be great for you because none of the partners at the firm have ed tech experience,' or, you know, 'We're actually in a competitor that we've kind of perceived to be something infringing in your space.' Like, both of those are things they could have controlled for before I even went into pitch, let alone go back and pitch them multiple times. So I think it's just that they needed more females in their portfolio until they kept trying to have me back, seeing if like maybe they could make it fit. And so when they would end up passing based on reasons that they would have known, just from having a quick phone call with me that you typically start these relationships on that I realized, Oh, my time is getting wasted. And so I think I spent easily twice as much time raising my first round of capital as a male founder would have.

Molly Mintz: How did it feel to know that you might have only been strung along and considered by these firms because they wanted to add a female founder to their portfolio?

Megan O'Connor: How it made me feel was twofold. One, someone said to me during the fundraising process, you know, 'Once you are invested in, your VCs are going to be very helpful because they obviously want to have the female founders in their portfolio win.' So that was an interesting thing, and I don't know that I have a positive or negative response to that, but it was one thing I had to face of like, Oh, I'm going to get a lot of attention from these funders because I'm in the minority of the type of CEOs they have in their portfolio simply by being a woman. How it also made me feel was that you almost had a little bit more to prove, right? As you know, a minority founder in a portfolio of any type, you stand out as the one or smaller group of people who have that, you know, backing as they come to the table. And so I definitely felt like I couldn't necessarily hide in the shadows. I felt like, you know, much more of the work that I did was on display. Yeah. So it definitely put a bit of a spotlight on me as a first time founder, and that made me anxious for sure.

Molly Mintz: Considering what you just said, when you are advising a hypothetical founder and supporting them as they go out and look for that first investment, as you were talking about the first priced investment, and you're recommending that they find the perfect partner, would you suggest that perhaps they should not pick a VC firm that has LPs that are not diverse, that come from this old school mentality that is still acting as a roadblock to achieving the kind of diversity and equality we want to see within entrepreneurship and capital allocation?

Megan O'Connor: I mean, I wish I could say that the answer is yes to that question, but very few founders raising early capital can be in a picky situation. You know, to my earlier point, I think I went on 80 meetings to raise $1 million, and that's just insane how much time went into that. So I would say, sure, if you've got a product that people are just, you know, fawning over and people are lining up at the door in order to invest in your product, maybe you're a second time founder and you've had a lot of success, or maybe you've just really tapped into something that already has a very viral component to it so people can see out the gate, this is going to be a successful product. Absolutely. Please be in a position where you're thinking about this level of tiered diversity as a necessity, but that's just not the case for most first time founders. Most first time founders are lucky if five people say, yes, I'll put in money.

Molly Mintz: What are steps that anyone, whether they are founders, whether they are in VC firms, whether they work in companies that are seeking investment, what can the typical person do to embody and strive for the kind of equitable and more inclusive economy that we want to create?

Megan O'Connor: Being super vocal about it, because while they might not be in a position to impact top-down out the gate as a early stage founder, you certainly can control the ecosystem that you're in control of, which is your company. So putting emphasis on what you do in terms of your early hiring and the way that you prioritize, and it's 100% something that needs to be prioritized out the gate. Your diversity and inclusion plan as a founder is important, and then reporting those metrics back up because it's very important and very powerful for CEOs to be able to say that there are funders who then will then report back to their LP is, 'This is what our company looks like, and then you can obviously see the stark differences between our composition and your composition in terms of people within the organization.' So that's something a founder can do, for sure. I think it's worth also asking in the meeting when you are having a pitch meeting; ask, you know, what does representation look like in your partnership? If you're on their website and all you see is a bunch of white men and blue suits on the partner page, that doesn't mean you shouldn't ask, 'Tell me a little bit about the diversity of your partnership. Tell me a little bit about what your plans are for future diversity within the partnership.' Because you are technically in a position where you're picking them as much as they are picking you. I did say, this was my earlier point, it's really hard to raise this capital and by all means it is, but once you're getting to the stage of signing on the dotted line, you want to make sure you really understand who these people are and so it's worth asking the question. Even though if you've seen on the website discouraging data because perhaps they have something new coming out that you don't know about, perhaps they do have a new partner coming, or perhaps they do have plans that you're unaware of. And if they don't, they should still be asked that because if enough people ask, that's when change happens.

Molly Mintz: When will we know and how will we know that we have achieved this change?

Megan O'Connor: Hmm. Such a good question. I think we'll know when people like me who are raising capital as a female, maybe the second time around, can see a very stark difference to the way it happened the first time. So it's four, maybe four and a half years, since I raised our first round of capital. I think I've got a little ways before I'm starting another company and raising again. But when I can say I'm gone back out there into the same venture community, and I've noticed a dramatic difference in the way it felt the first time, I think that's what we'll know what's changed.

Molly Mintz: Thank you for listening to this episode of Change Pays. Thank you to Heather, Melissa, and Megan for talking with me. Subscribe to this show on Apple Podcasts and Spotify, share your feedback on social media with the hashtag #ChangePays, and listen to new episodes at the beginning of every month everywhere podcasts are played. To read the research we discuss in this episode, visit spglobal.com/changepays.

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